There has been an increasing shift of focus of scholars and practitioners in viewing development from traditional approaches of development towards alternative approaches. Social capital and assets based community development approaches are prominent among such alternative views on development. This research, by contextualizing the focal concepts of these approaches in the local governance systems of Nepal, aims to understand and describe the local realities. From a centralized state, Nepal adopted federalism in 2015 and local level elections were held in 2017, after twenty years since the last local election. In this light, it is timely and relevant to explore how alternative theories and models of rural community development could operate in the new system. Extensive review of literature on this field was done to understand the focal concepts and their relationships. It was followed by document analysis to contextualize these concepts by understanding the local systems and settings of local governments in Nepal. Scholarly sources such as books, journals and official documents such as the Constitution of Nepal 2015, official reports from sources of government, national and international agencies and organizations, statistical surveys, census data, etc. were valuable sources of secondary data and information. The findings of this research suggest that heterogeneity in Nepalese communities has had its effects on social capital accumulation and effective participation. It also found that lack of meaningful interaction between marginalized rural communities and public institutions have limited their economic opportunities and development capacity. However, with institutional arrangements of inclusive representation, affirmative action and other policy measures adopted in the new system of governance as guaranteed by the provisions of the new constitution, foundations have been laid to increase the stock of bridging social capital and promote community action. Furthermore, with the emergence of new leaders elected in the local level election of 2017 and other informal community leaderships, a ‘mediating agency’ is identified who could act as a link between communities and public institutions and mobilize local assets to create economic opportunities through their linking ties.